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Always Yield to individual Opportunities



March 23, 2013 – Comments (0)

In Howard Marks most recent Chairman memo, he remarks intensively about his disdain for investment generaliztions. He certainly is not wrong in his thinking because some of the biggest hazards (e.g. Long-Term Capital Management and the usual concepts behind most quant funds).

There's little I hate more than investment generaliztions. For years, for example, self-styled authorities on the high yield bond market would say "bond defaults typically tae place 2-3 years after issuance." That always set my teeth on edge.


As he explains his viewpoints, the equity risk premium, brought up byFierceFinance that sparked the memo, gets the full brunt of what he believes is wrong with how it is used. It may seem petty to harps on the article's present tense use of the term, as written in the corresponding online article in Pensions & Investments:

The long-term equity risk premium is typically between 4.5% and 5%.

How does one sentence gain such attention to spark a nine page assault?

The memo is a great read to gain better perspective in thinking about markets going forward. He brings a far more appropriate line of thinking in assessing markets by using earnings yield or the inverse property of the infamous price to earnings ratio, P/E. 

I have tried to use it in a similar fashion when assessing Lender Process Services Inc., $LPS, when it seemed to be destined for failure and written off by most. Howard Mark's memo has been a good reminder of what perspectives to hold when valuations, broadly speaking, gradually becomes richer with time.


Here is the memeo by Howard Marks: The Outlook for Equities

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